Press release

Global and Middle East banking industry name regulation as top risk over macro-economic concerns

‘Banana Skins’ poll identifies top threats to banks

June 3, 2014 - Regulation topped the list of risks among the global banking industry– replacing 2012’s leading threat, the macro-economic environment, according to the Banking Banana Skins 2014 survey
The CSFI’s biennial Banking Banana Skins survey, produced in association with PwC, revealed the overwhelming message from respondents: the weight of new regulation is becoming excessive and could dampen economic recovery and growth. The poll is based on responses from more than 650 bankers, banking regulators and close observers of the banking industry in 59 countries.

Commenting on the survey Madhukar Shenoy, PwC Middle East Financial Services Risk and Regulatory Leader, said “Most risks identified were relevant to banks in the Middle East. While regulation was seen as the No 1 risk globally, regional regulators have used a pragmatic approach to introducing change in regulation by making sure new regulations take account of the local and region specific market circumstances.”

Adding: “Many of the identified risks such as technology risk, profitability, interest rate risk and pricing of risk are major concerns for regional banks.”

Political interference was also specified by respondents as causing more costs and constraints to the banking sector. Some of the strongest concerns around political interference come from Europe – where extensive measures have been proposed or adopted at both the EU and national levels to make banks safer.

However, the survey also shows that anxiety about the outlook for banks has started to decline for the first time in seven years, suggesting that the operating climate for banks is finally turning.

Banking Banana Skins 2014

(2012 ranking in brackets)

1

Regulation (6)

2

Political interference (5)

3

Macro-economic environment (1)

4

Technology risk (18)

5

Profitability (7)

6

Pricing of risk (11)

7

Credit risk (2)

8

Corporate governance (9)

9

Criminality (24)

10

Capital availability (4)

11

Quality of risk management (10)

12

Interest rates (17)

13

Back office (13)

14

Change management (15)

15

Liquidity (3)

16

Sales and business practices (20)

17

Emerging markets (22)

18

Derivatives (8)

19

Social media (-)

20

Shadow banking (-)

21

Management incentives (14)

22

Currency (19)

23

Human resources (28)

24

Reliance on third parties (29)

25

Social sustainability (25)

26

Equity markets (21)

27

Commodity markets (26)

28

Business continuation (12)

Slim Ben Ali, PwC’s Middle East Risk Director added, “The region is gradually getting ahead of the curve with regards to risk management practices. Banks in the region are highly aware of the risks they face and are actively pursuing risk management approaches that are considered best-in-class. However, it is important that banks recognise the need to align their risk strategies with their overall business strategies as they increasingly focus on capital and liquidity requirements under the new Basel III Accord.’’

The poll shows that concerns expressed in earlier surveys about capital availability, liquidity, credit quality and exotic products in the banking system have begun to ease. Although confidence about the macro-economic outlook has also strengthened, the survey reveals strong ongoing concern about the stability of the Eurozone, and rising worries about emerging markets, particularly China where the banking system is seen to be under stress. The outlook for the tapering of quantitative easing by central banks is widely seen as crucial to global economic prospects.

A fast-rising risk in the Banana Skins ranking is technology risk, which has risen from No. 18 to No. 4, largely on the back of strengthening concern about cybercrime. This is a problem which, as one respondent said: “can only get bigger” and cost banks heavily both financially and reputationally. Technology concerns also centre on back office systems which are seen to be ageing but also a low priority for investment.

Madhukar added “Technology risk is a clearly a concern in the Middle East. According to our latest PwC Middle East CEO Survey, 68% of Middle Eastern CEOs were considered cybercrime to be a potential business threat to growth of their businesses.”

A breakdown of responses shows that all major respondent types (bankers, observers and risk managers) are strongly concerned about regulatory excess and political interference, as well as the state of the global economy. However non-bankers are more worried about institutional risks in banks such as the quality of governance and management; bankers play these risks down.

By region, the responses show concern about regulation and politics to be strongest in Europe and North America. The top concerns in the Asia Pacific region focus more on the macro-economy and the risk of sharp changes in interest rates.

“Although there are encouraging signs in this survey, respondents’ concerns around over regulation need to be taken seriously. It would be ironic if new banking rules ended up snuffing out the recovery,” said David Lascelles, the survey’s editor.

-END-

NOTES TO EDITORS

The CSFI’s “Banana Skins” series provides periodic snapshots of the risk landscape in the financial services sector. As well as the banking series, the CSFI conducts surveys of the risks in insurance and microfinance.

For further information, please contact David Lascelles, CSFI, at +44 (0)7710 088658, david@davidlascelles.com

About The Centre for the Study of Financial Innovation (CSFI)

CSFI is an independent not-for-profit think tank based in London which researches the future of financial services. It has an affiliate in New York, New York CSFI. The CSFI has been producing regular Banana Skins surveys since 1995. www.csfi.org.uk

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